CONMED Corporation

Before the conference call begins, let me remind you that during this call, management will be making comments and statements regarding its financial outlook, its plans, and objectives. These statements represent the forward-looking statements that involve risk and uncertainty as those terms are defined under the federal security laws. Investors are cautioned that any such forward-looking statements are not guaranteed for future events performance, or results. The company's actual results may differ materially from its current expectations. Please refer to the risk and other uncertainties disclosed under the forward-looking information in today's press release, as well as the company's SEC filings for more details on the risks and uncertainties that may cause actual results to differ materially. The company disclaims any obligation to update any further looking excuse me, any forward-looking statements that may be discussed during this call, except it may be required by applicable law. You will also hear management refer to non-GAAP or adjusted measurements during this discussion. While these figures are not a substitute for GAAP measurements, management uses these figures to aid in monitoring the company's ongoing financial performances from quarter to quarter and year to year on a regular basis. and for the benchmarking against other medical technology companies. Adjusted net income and adjusted earnings from share measure the income of the company, excluding credit or charges that are considered by the company to be special or outside of its normal ongoing operations. These adjusting items are specified in the reconciliation supporting the company's earning releases posted to the company's website. With these required announcements completed, I will turn the call over to Curt Hartman, Con Ed's Chair of the Board, President, and Chief Executive Officer for opening remarks. Mr. Hartman, please go ahead.

Thank you, Lisa. Good afternoon and thank you for joining us for Con Ed's third quarter 2022 earnings call. I'm joined by Todd Garner, Executive Vice President and Chief Financial Officer. Today we will walk you through our third quarter results and our full year outlook. We will then open the call to your questions. Turning to our results, total sales for the third quarter were $275.1 million, representing a year-over-year increase of 10.6% as reported and an increase of 12.1% in constant currency versus the same quarter in 2021. From an earnings perspective during the third quarter, Our GAAP net income totaled $46.1 million. This compares to net income of $14.9 million in the third quarter of 2021. Excluding special items that affected comparability, our adjusted net income was $23.8 million, a decline of 3.7% versus the prior year's third quarter, and our adjusted diluted net earnings per share came in at 77 cents, a decline of 3.8% versus the prior year's third quarter. Looking at the quarter in more detail, the international markets delivered solid results with 9.6% constant currency growth, while the domestic business grew 14.2% reported. With that said, the industry continues to face headwinds. From my perspective, the two largest issues remain less than ideal health care staffing levels and ongoing global supply chain inconsistencies. These issues did not worsen in the third quarter, but we saw only marginal improvement compared to the second quarter. From a sales run rate perspective, the quarter started slowly, and while the September run rate improved, that recovery was not strong enough to achieve our double-digit growth outlook on the top line. Regarding the acquisitions, our first full quarter within DeBones was very positive, and we remain excited about this business. Additionally, we were incredibly pleased to announce and close on the BioRes acquisition in August. We've quickly embraced this business and are laser-focused on progressing clinical study work, training the sales force, and educating our customers on the product. On this last point, I personally attended a large customer event during September. If this meeting was an early indication of customers' enthusiasm for the concept of healing, then our instincts on the BioBrace technology grew well justified in the years ahead. I'll wrap up my comments with a mention of a non-financial goal. I'm proud to announce that ConMed recently published its first ESG sustainability report, which can be found on our website. This report is the work product of a global cross-functional team within ConMed supported by an external third-party expert. Importantly, all of the information in our report has been validated by our audit group. This report will serve as our baseline as we responsibly pursue enhancements to our ESG initiatives across ConMed. I want to thank the ConMed team responsible for this effort. In closing, I'm proud of the ConMed team and the progress we've made both for the short-term and the long-term outlook of the company. With three-quarters of 2022 behind us, we have delivered strong constant currency organic growth and have closed on two high-growth, high-margin acquisitions that have further strengthened our outlook for the future while continuing to navigate a challenging global market. The ConMed Global Leadership Team and our organization around the world continue to perform exceptionally well in an unpredictable environment. I'll now turn the call over to Todd, who will provide a more detailed analysis of our financial performance and walk you through our outlook. Todd? Thank you, Kurt.

All sales growth numbers I referenced today will be given in constant currency. The reconciliation to gap numbers is included in our press release. As usual, we have included an investor deck on our website that summarizes the results of the quarter and our updated guidance. For the third quarter of 2022, our total sales increased 12.1%. Revenue from the recent acquisitions was $10.3 million in the quarter, putting our global organic growth for Q3 at 7.9%. For Q3, our sales in the U.S. increased 14.2% versus the prior year quarter. Our international sales grew 9.6% for the quarter compared to Q3 2021. Worldwide orthopedics revenue grew 14.0% in the third quarter. In the U.S., orthopedic sales grew 20.4%, and internationally, orthopedic sales increased 10.4%. Total worldwide general surgery revenue increased 10.7% in the quarter. U.S. general surgery revenue grew 11.8%. Internationally, general surgery revenue increased 8.5%. Now let's move to the expense side of the income statement. We will discuss expenses and profitability in the third quarter, excluding special items, which include charges for acquisitions, debt refinancing costs, amortization of intangible assets, and amortization of deferred financing fees and debt discount net of tax. Adjusted gross margin for the third quarter was 55.9%, a decrease of 130 basis points from the prior year quarter. Last quarter, I said to expect gross margins around 55% for the back half of 2022. In Q3, some mixed issues, including lower capital sales, caused a stronger than expected gross margin. We think some of that mix may swing back the other way in Q4. and the increased currency headwind will impact Q4 margins. With these dynamics, Q4 gross margins could end up below 55%. Research and development expense for the third quarter was 4.6% of sales, 20 basis points higher than the prior year quarter. Third quarter adjusted SG&A expenses were 37.7% of sales, a decrease of 170 basis points from Q3 2021. We are getting the returns on our Salesforce expansion from last summer and expect those returns to increase over the coming quarters. Specifically in Q4, we would expect adjusted SG&A expense to be between 35.5% and 36.0% of sales. On an adjusted basis, interest expense was $7.0 million in the third quarter. We expect interest expense in the coming quarters to be $7.5 million or more depending on future Federal Reserve decisions. The adjusted effective tax rate was 24.9% in Q3, and we think 25% is the right expectation going forward. Third quarter GAAP net income was $46.2 million. This compares to GAAP net income of $14.9 million in Q3 of 2021. GAAP earnings per diluted share were $1.48 this quarter compared to 47 cents a year ago. Excluding the impact of special items discussed earlier, we reported adjusted net income of $23.8 million, a decrease of 3.7% compared to the third quarter of 2021. Our Q3 adjusted diluted net earnings per share was 77 cents, a decrease of 3.8% compared to the prior year quarter. Turning to the balance sheet, our cash balance at the end of the quarter was $33.4 million compared to $53.2 million as of June 30th. Accounts receivable days as of September 30th were 65 days compared to 64 at the end of Q2. Inventory days at quarter end were 222 compared to 192 at June 30th. Nine days of the increase is related to the inventory from the recent acquisitions. The remaining increase is due to building inventory to mitigate supply chain challenges. Long-term debt at the end of the quarter was $1.036 billion versus $982 million as of June 30th. The changes due to the acquisition of Biores during the quarter. Our leverage ratio on September 30th, 2022 was 5.0 times compared to 4.7 times on June 30th. Cashflow provided from operations for the quarter was $25.9 million compared to $21.4 million in the third quarter of 2021. Capital expenditures in the third quarter were $6.7 million compared to $5.6 million a year ago. Now let's turn to financial guidance. We expect reported revenue in Q4 to be between $305 million and $320 million. This includes increased currency headwinds of 300 to 350 basis points for Q4 alone. For the full year 2022, we now estimate the currency headwind to revenue to be between 150 and 180 basis points and reported revenue to be between $1.1 billion and $1.115 billion. This updated revenue guidance translates to organic growth between 11 and 16 percent in Q4 and between 8 and 9 percent for the full year. We've included the detail of the different components of our financial guidance in the investor deck associated with this call, which can be found on our website. We expect adjusted EPS in Q4 between 98 cents and $1.05. That makes our full year 2022 adjusted EPS guidance range between $3.21 and $3.28. The reduction to the full year range from last quarter is due to the decrease in the potential upside in revenue we anticipated 90 days ago. We now expect the procedure growth to be more moderate than we did a quarter ago, and hospital staffing remains a challenge. Inflation and currency are hindering our ability to offset the reductions to revenue. We will talk about our 2023 guidance in January, but we can already see that the recent significant strengthening of the US dollar will create a meaningful currency headwind for 2023. Given the multiple moving factors involved in the calculation, it is difficult to accurately project, but our current estimates are that the impact could now be around 30 cents. Obviously, as we put the 2023 plan together, we will be looking for ways to mitigate this headwind as much as possible. We feel very good about the exciting revenue growth potential from the portfolio we have built, including our recent acquisitions. We are keeping the engine strong while being responsive to the dynamics in the marketplace. When the cost challenges subside, and they will at some point, we are excited about the profitability this improved growth and margin engine can provide. And with that, we'd like to open it up to your questions, and I'll hand it back to Lisa.

Thank you. As a reminder, if you'd like to ask a question, please press star 11 on your telephone. We also ask that you limit yourself to one question and one follow-up. One moment while we compile the Q&A roster. Thank you at this time. We are bringing to the platform M. Madison from Neham. Please go ahead. Your line is open.

Yeah, thanks for taking my questions. I guess I'll just start with the currency. You know, the 30 cents headwind, it seems like it's quite a bit bigger at thought that Todd had said that it would be kind of like 10 cents back in mid September. And I know that the dollars, you know, continue to strengthen quite a bit, but, uh, just curious about kind of the difference there. Sorry for 2023. That is just to be clear.

Yeah, sure. Mike. Yeah. So through the summer we had, uh, run that analysis and you're right in early September, which was actually based on, um, your rates in the summer, uh, we had estimated about 10 cents. Obviously, currency has moved quite a bit since then, and that's what's driven the change. Okay.

And just in terms of the revenue kind of shortfall that you're talking about, you know, how confident are you that it's really driven by kind of just overall procedure growth, market growth, as opposed to, you know, you know, market share, competitive dynamics, or something like that?

Yeah, I think, you know, I look at the detail in our press release, and our consumable volume was very strong in the quarter relative to prior year. So we feel like we're getting our share of the procedures. Obviously, we did not have a good capital quarter. We've not had a great capital year. Some of that has been supply chain constraints. Some of that has been the age of our capital. Some of that has just been ongoing enhancements to the capital we have in the market. So I really think that there's good volume in the marketplace. Again, better staffing would help that. And I recently read an article that even staffing levels at the small town hospitals are slowing things down, never mind the big centers. But fighting through that is, I think, what facilities are doing and companies are trying to do their best to help them. So I feel good about our overall business. I feel good about the composition of our product mix. We've got new products hitting the market as well. So I don't see any indications that we're losing share at this point in time. And I guess if I did, I would point to capital right now as a one spot where we may be a little suspect given the age of the portfolio. Okay, got it. Thank you.

Thank you. Our next question will be coming from Younglee of Jefferies. One moment, please. Your line is open.

All right. Hey, guys. Can you hear me all right?

Yeah, we can.

All right, great. Thanks so much for the questions. I guess to start, was wondering, you know, it seems like AirSeal and Buffalo Filter are continuing to grow 20% plus, so it's pretty encouraging. Can you maybe talk a little bit more about the business performance during the quarter, and if you can comment on the OEM part, that would be helpful as well.

Sure. Yeah, we had a very good quarter. AirSeal was Absolutely phenomenal. It was very interesting. We had strong growth internationally as well as in the domestic market. I think everybody probably saw Intuitive Surgical's results, and that has always been a wind at our back in the air seal market. But I would tell everybody on the call that we outpaced that growth in air seal. On Buffalo Filter, I think last quarter we said we were going to avoid the conversation on OEM. This is more about the bigger share of the business is the branded portion. And we see that business as continuing to be a strong franchise for ConMed and having good results. Consumables have picked up as a procedure volume has picked up, obviously, broadly speaking in the markets, whether it's in the U.S. or in the international markets where they have smoke legislation. And on that, you know, today there are nine states that have legislation. Five of those states are live. Four of them have future dates that are effective. They represent about 17.5% of the population, 19% of the hospitals. There's an additional three states that could fall into the legislative band still in 2022, New Jersey, New York, and Texas. And interestingly, that would represent 18% of the population, about 15% of the hospitals. So with three additional states, we could see the number, the percentage of the population, percentage of hospitals effectively double. And then there's approximately seven that are on deck for 2024. So there's good momentum in the legislative side. There's good momentum as procedures have recovered. And those things all help serve and grow the smoke business.

Okay, great. Really appreciate the comment. I guess for my follow-up, just kind of want to level set some consensus expectations for next year. I think Intubones has around 43 million. And, you know, before for BioRAS, you mentioned mid-single digits in 2023. You know, it sounds like the initial interest is pretty high. So if you can maybe comment about those type of consensus expectations if they're in the right place.

Yeah, I'm not going to talk about consensus, Young, but I will talk about what we've said, right? What we've said is that with Interbones, we said that that market was growing in a high single digits and that business was growing at least twice that. And it has certainly done that since we've owned it. So it's off to a very good start and doing very well. And then on, you're right, on Biores, we said that 2023 should be single digit millions in revenue and then in 2024 we would get to double digit millions in revenue. So that's what we've said and I'm not going to grade consensus here with you today.

Okay, fair enough. Thanks so much.

Thank you. One moment for the next question. The next question we have is coming from Robbie. Marcus of JP Morgan, please go ahead.

Yeah, hi, thanks for taking the questions. Maybe first, you know, it does look like capital was the bad guy here. That's the one that missed pretty significantly versus consensus. You know, capital is not the best environment, but we are seeing different trends from companies out there. You talk about some of this as backlogs. Maybe you could just kind of put some of the pieces together, is how much is a weak capital environment? How much is not having enough supply due to backlog? And how much is that backlog? And do you expect it to pick up anytime soon?

Yeah, I think anything that's related to electronics, circuit boards, you're going to see delays. And we have an energy platform that's sold on the general surgery side that is not immune to those challenges. And that is not a new problem, but getting those supplies through the chain into production has been more delayed than we might have originally assumed. We've made some progress on some of the products, but we have others that we're still working our way through those electronics and supply chain issues. As I mentioned earlier in one of the other sections, some of our capital is a little bit dated. And we need to refresh that and get that into the marketplace. That always plays with capital results. New capital sells better. It's got better features, better benefits. And so we're working on those next generation platforms. So it's a combination of both. I've got to be honest with you. I don't think we have seen any drop in appetite for capital from our customers as procedure volumes have increased relative to what they might have been in the past 12, previous 12 months, people are buying the capital that they need to do the procedures. And every capital item we sell that has to be in the room to do the procedure. So I don't think we've yet felt a slowdown by our customer base on capital acquisition interest.

Great. Maybe, Todd, as we think about that $0.30 for next year on EPS, I believe you also have some floating rate debt as well. So First on the FX component, that's a bigger drop through, 10% or so than we would normally see from ConMed. Maybe you could walk us through, is it a function of the hedges or what exactly is going on there? And at current interest rates and assuming, I believe, we're at 50 bps heading into the year and maybe 25 bps in the beginning of next year, how should we be thinking about the interest expense for 2020? Sure.

Yeah, so the hedges basically defer the cost, right? Their job is to protect the near term and take volatility out of the near term. But at some point, those bills come due. And so I think because almost half of our business is outside the United States and because we do hedge essentially everywhere that we do business, I think we do have a little more exposure on a relative basis to that than others. And so as the currency has moved here in the last few months and then especially very recently, that increases the mass of what Bill says is going to be coming due, right? Now, obviously, the answer will be different than that because rates will move. mix will move you know it's very dependent on uh you know what we sell and what we spend in what geography and then of course what rates do and so it's very difficult to project with precision but i did want to kind of get everybody in the ballpark of where the math says we are today because because we do have a i think a more comprehensive hedging program than a lot of the names that you spend time on. And so there is a little, we've been more protected in 2022 than others. And that pain has been deferred a little bit to 2023, which is the job of the hedges. It's what they do. Let me pause there, Robbie, on that before I go to interest expense.

And just confirming, you run it through sales, right? So that's where we'll see the impact as it falls through the P&L?

Yeah, we have both revenue and cost hedges. So it kind of shows up throughout the P&L. On interest expense, what I said for Q4, the $7.5 million, that's based on current rates. So that's a quarterly number. You know, we expect the debt to come down, right, as we pay down debt. But I can't tell you what interest rates are going to do. I think obviously the consensus is that they're probably going to go up. And so what I've told you is that Q4 should be at least $7.5 million. We'll have to see what the Fed does at the next meeting. And that will affect, you know, the coming quarters.

And if I could sneak one last one in, I think people are just a little concerned on the organic sales miss versus expectations. Are you sure that it's more of a market issue rather than a share issue or anything else we should be thinking about there in third quarter and going forward? Thanks a lot.

Yeah. obviously we pay pretty close attention to our business and where the opportunities are and where we perhaps have lost opportunities or picked up opportunities. And as I said, the July-August performance was slow. It just was slow for our mix of businesses. Things improved dramatically in the month of September, but not enough to close the gap. And then obviously we didn't close the capital that we needed to close to secure the quarter. So I don't feel like that in a 90-day window we've suddenly started losing market share. So I feel pretty good about where we're at. Great. Thanks a lot.

Thank you. One moment for our next question. And our next question is coming from Matthew Misham of KeyBank. Please go ahead.

Hey, good afternoon and thank you for taking the questions. I just wanted to follow up on the age of the capital. Which capital are you referring to? Because if you're referring to a potential refresh of AirSeal and Buffalo Filter, I think that's very exciting potentially into next year or the year after. Or are we talking about the powered instruments and surgical visualization? stuff that's a little bit more like legacy ConMed.

Well, I think certainly the legacy ConMed items that you discussed, the power tools, if you look at the entrant date to the market on those, they're probably coming up in that window where a refresh or additions, expansions would be in our not-too-distant future. As far as AirSeal goes, the AirSeal platform, the AirSeal box, is obviously a very important component of our overall growth story. And I think everybody should assume that whether it's the consumables or the capital, those remain under development and new items, new features coming all the time. Again, I think everybody on the call knows we don't talk about timing on new products to market. We prefer to get them in the market before we talk about them, and we're going to stay true to that approach.

And on bioreson, just to follow up to the previous one where you guys don't really talk about like new product development and how that, how are you going to talk about like biores moving, moving forward as like you're developing like that, that platform? Are you going to specifically call out numbers once you get past like the initial M&A phase of it and it becomes organic? Just, I'm just curious how you, how you're thinking about, you know, communicating that platform moving forward.

I think we'll do what we've always done. Once it becomes organic, it, it will fit into the orthopedics category. I'm sure we'll make non-financial commentary relative to it. We'll be clearly talking about studies as they come to fruition and close and further impact the results. But we're not going to break out biores or endobones as individual line items in every call.

Okay. And if I could squeeze just one more, and I think obviously with the leverage, free cash flow is going to become pretty important going into next year. Just as you think about the assumptions of free cash flow for this year, how should we be thinking about it? And then just, I guess, any major moving pieces you're thinking around free cash flow without having to give guidance for next year?

Sure, Matt. You know, I think 2022 has been tough because of the inventory, right? You know, trying to stock up to mitigate the supply chain issues has put a dent in our free cash flow because of the working capital increases. I would expect that as we go to 2023, that is more neutralized. And so we should get back to free cash flow traveling closer to net income as we've traditionally been. So 2022 has been the one-off year where we've invested a lot in working capital I think intelligently and strategically to try and make sure we could service our customers in a very difficult supply chain environment. But the hope is that we've got those inventory levels at a place where they can be relatively stable and that free cash flow should tie closer to net income as we move forward. Thanks, Todd.

Thank you. And for our next question, one moment, please. Our next question will be coming from Matt O'Brien of Piper Spandler. Please go ahead.

Thanks for taking the question. You know, as I look at the, what you said as far as growth of Intabones and BioRez or contribution to the acquisitions, I think you said 420 basis points. I think that's about $10.5 million. I'm assuming a majority of that is Intabones at this point. I don't think we're expecting much out of BioRez. So is that math about right? It seems like Intabones is running a little bit ahead of what you guys were kind of contemplating when you did that deal. And we'd just love to hear what exactly you're seeing there from a momentum perspective in that category. Okay.

Yeah, so on the pure math, you're right. I mean, the lion's share of that is Intubones. Biores is just getting started. So very pleased with both of them, but Intubones is by far the revenue contributor at this point.

And I think, Matt, in terms of the marketplace reaction with Intubones, I think when we originally did the deal, we guided to $20 million in the back half. Obviously, it's going to be more than that because we close before the end of the second quarter. But I think we've also increased our expectations here for the remainder of the year based on what has happened and based on how that business trends. There is a strong fourth quarter push in foot and ankle. And we've also been, candidly, some of the things we saw in diligence were even better than we thought. We're very excited by the work. that they're doing with their quantum ankle. We're very excited by a launch of a new product that's just hitting the market, some carbon plating that's got some unique features and benefits. Very early days on that, but enthusiasm, early enthusiasm. And then just the caliber of the sales force. I mean, we bought a complete standalone business, and we've been very pleased with the sales force and their commitment. their commitment under ConMed's ownership. That's always a risk when you have a transaction. Sales forces are very suspect of transactions, and this sales force has settled right in and really done a nice job for us. And we're very pleased overall with the team, and we're ramping up in the international markets. A very small contribution at this point in time in international Part of what ConMed brings to that story is the international approval pathway, the RAQA work that needs to be done to get those approvals. We're suited for that work. We have the staff, the resources to do that work. So everything that we had seen in diligence has come to fruition. Haven't really run into any negative surprises and really pleased with the depth of experience that the leadership team brings to ConMed across the foot and ankle space.

Okay, that's great to hear. And then the follow-up question is just, you know, you've got this extra currency headwind. You've got more interest expense you're going to be facing for 23. How do you balance, you know, investing for growth and smoke plus, you know, these acquisitions versus profitability? And I guess ask directly, and I'm not sure Todd's going to answer this, but can you grow earnings next year given all of these headwinds?

Well, look, we're going to talk about 2023 in January, but we've got a very strong revenue growth line, right? And so we'll be focused on fueling that and making sure that that stays strong. The cost environment, the macro environment is challenging and has been challenging for longer than any of us are happy about. We believe strongly the way out of this is growth. And so we have made the conscious decision to maintain the engine, not cut resources more deeply than we already have, and be able to service our customers and do the best we can on the revenue line. And then that'll provide the room in the P&L to drop profitability through the bottom. As you've said, We talked about the acquisitions. They're still dilutive into 2023 before they get accretive in 2024. And so we've got to finish digesting those. And right now, currency is a stiffer headwind than we thought a few months ago. That can change the other way, right? And so we'll have to see how all of that shakes out as we put the final plan together and we talk to you about 2023 in January. Okay.

Got it. Thank you.

Thank you. One moment while we prepare for the next question. The next question is coming from Rick Wise of FISO. Please go ahead. Your line is open.

Good afternoon to you both. Todd, I was struck by, I think you said it, maybe Kurt said it, Talking about the Salesforce, talking about SG&A, you said we're starting to get returns or better returns on your sales investment. Knowing how significantly you expanded the Salesforce, I think maybe twice over the last couple of years, I was hoping you could expand on those comments. When you use the word returns, are you seeing more new account opening, going deeper in existing accounts? What part of the business is benefiting? And, again, this isn't a request for guidance anymore. How does that set you up for the potential, the possibility of maybe more meaningful or significant operating sales or operating leverage as we look ahead to 2023?

Yeah, you're right, Rick. It was me. And it was a returns comment, which is basically, we made significant Salesforce expansions last summer, believing that volumes were about to come back in a strong way. Obviously, we all know that because Delta and Omicron are the volumes have been delayed and were not like we all thought they would be at the time. And so it took longer than it normally does for those new sales reps to get the customer facing time and experience to be productive and to start paying back. And so, but we are now, you know, a year later, so it's taken longer than it normally would, but just based on the leverage, right, SG&A as a percentage of sales, which has been, which was higher as we digested those investments, you now see that we are lower than the prior year. And so that we are getting the returns basically on those additional resources. And so, you know, I think we're, in hindsight, did we do it a couple of quarters early? Yeah, probably because none of us knew what was going to happen at the end of last year, but we're very happy with the decisions we made and the investments we made, and those teams are off and running and being productive now, and we expect that they will only get more productive in the coming quarters.

Gotcha. And I guess the next thing I'd say, at a high level, Craig, As you think about 23, 24, I'm just wondering how, in your own mind, if you had to say now, how do you think the recovery, based on what you know for your business, how's it going to unfold? I did a 150-doc survey recently, and the majority of the docs are saying that staffing is going to be a headwind through much of 23. It's going to get better, they think. in the second half, but they sort of, and I'm summarizing their comments, they basically said 24 is going to be the first time where they feel like they're going to have worked through a lot of the staffing issues. Is that the way you're seeing? Is that the way you're planning? And is the setup for next year sort of a softer first half? Again, aside from currency, softer first half and acceleration through the second half into 24. Is that the way you're thinking about it?

I don't think I would believe that surgical staff levels, even broadly speaking, healthcare staffing levels, are going to improve overnight. I think this is something that's going to be measured in quarters, if not, to your comment, into 2024. There's a lot that has to happen to get back to those levels. those fully staffed levels. And there are some very well-known institutions doing some very dramatic things to try to navigate the current staff challenges. And I think there are other factors at play as well. You know, we're coming into seasonal flu and who knows what will happen with COVID and childhood respiratory disease and how that puts burdens on health systems. So There's so many other factors that go into that question, Rick. It's a little hard to predict, but the one thing I am confident of, it will not be solved overnight. It's going to take some time. With that said, when I look at our portfolio, whether it's the recent acquisitions of Indobones or Biores, both we believe will be high growth assets with great gross margins. or I look at existing portfolio products that ConMed has, whether it's AirSeal, Buffalo Filter, are recently released in 2022, Argo, Anchor, the ClickLock portfolio. Those items are all high gross margin items. Our consumable volume was very strong really throughout the first three quarters of this year, and we can just continue to build on that with organic innovation as well. We'll do everything possible that we control and let the market sort out those other macro factors. You know, when we get to January, we'll give more outlook views on 2023. But what we're responsible for, we will be accountable with it and deliver a top line that I think will get us where we need to get.

Gotcha.

Thank you so much.

Thank you. One moment while we prepare for our last question. And our last question will be coming from Travis Speed. Travis Speed of Bank of America Securities, your line is open.

Hey, thanks for taking the question. Going back to the procedure side, I guess it kind of stands out because, you know, other companies are saying things a little bit better, but it sounds like you expect the actual procedure growth to moderate a little bit. What do you think it is about the mix of your business that's different. And I guess also, are you assuming the second wave, I think that was the, you're assuming a COVID wave again, and the guidance is making sure that was still the case.

I didn't specifically call out a COVID wave, but I think anybody who's reading materials around healthcare understands that in the current environment, there's already respiratory disease that's impacting health systems. There could be, you know, the typical COVID wave that we've now become accustomed to after a couple of years here in the fall and the seasonal flu, which certainly is on everybody's mind when you, I think somebody actually came up with the term for it, the trifecta of viruses this year as we go into the end of the year. So that could certainly slow down what I would refer to as elective procedures. And by and large, the majority of what we do are elective procedures. Now, certainly there's There's some general surgery cases that are not elective, but they can even be delayed. So I just think we have a mix of businesses that is a little bit more elective in nature. Not to say you can put them off, because I think in wave one of COVID, it demonstrated that there were comorbidities associated with delaying surgery, broadly speaking. And I think systems have learned that's not a wise move, either for the patient or, candidly, for their own workload life balance. So it's just our mix of business a little bit different than others. And, you know, our third quarter started slow, picked up as we got into September at a great rate. And that was nice to see. And we hope that continues into the fourth quarter and gets us to a better spot.

Okay. Fair enough. On the 300 basis points of inflation, Todd, Just curious how that's been trending at this point and if the second half gross margin is how we should still think about the jumping off point for next year.

Generally, obviously currency got a little worse. That's affecting us in Q4 more than we expected three months ago. But I still think that 55 range is probably the right current baseline and then You know, the question is, is how quickly does inflation improve? As Kurt said, I'm not sure, you know, it hasn't really gotten worse, but it hasn't really gotten a lot better so far in the back half of this year. So we're probably going to have to be a little patient there. So, yeah, but I think that that mid-50s is probably, you know, the current baseline. Obviously, the acquisitions help that, and as they grow, that's accretive because they're both over 80%. And then AirSeal is in the low 70s. Buffalo Filter is in the low to mid 60s. So all of our growth drivers are accretive to margins. And so with a little time, we've got a good engine that is driving improving margins. It's just being masked by the macro challenges that we're facing out there between supply chain and currency. So, you know, at some point, like I said, at some point that cloud will move on, and then I think people will feel really good about our margin profile and our growth profile. But, you know, we're kind of in the clouds right now.

All right. Thanks for taking the questions. We'll follow up offline. Thank you. Thanks, Travis.

Thank you. That concludes the Q&A session for today. And now I would like to turn the call back over to Mr. Hartman. Thank you, Lisa.

And I want to thank everybody. Thank you, Lisa. I want to thank everybody for your time today. And we look forward to speaking with all of you on our next earnings call. Thank you and good night.

Today's conference call. You may all disconnect. Thank you. This concludes today's conference call. You may all disconnect. You all have a great evening.

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